Effective steps for setting your financial course

Managing one’s personal finances has for many reasons become increasingly complex, and knowing where to start one’s journey and prioritise one’s finances can be overwhelming. Increased human longevity, a broad range of financial solutions, a highly regulated financial services industry together with the inherent complexities of crypto currency may leave some feeling somewhat daunted. In this article, we break down the financial planning process into a series of 9 steps which are designed to help you set the course and begin your financial planning journey the right way.

  1. Set goals and revisit them often

Life is fluid and circumstances change quickly, so take this into account when setting your goals and be prepared to revisit them as and when your circumstances dictate. Be realistic but audacious about your lifestyle goals, keeping in mind that documented goals can be powerful motivators and catalysts for innovation and creativity. So, while you ideally want your goals to be realistically achievable, don’t be afraid to push the boundaries of what you feel is possible for your life. Do not let lack of affordability prevent you from setting a goal. There are no turn-key financial solutions when it comes to financial planning, but rather a series of prioritised solutions that can be implemented in line with your needs and affordability.

  1. Adopt a values-based budget

Prepare a budget that allows you to allocate money towards the things that you deem important in your life. In a world of heightened consumerism, it can be difficult to separate market-driven messages from your true value system, so spend time deciding what is important in your life and where you want to channel your expenditure. Not all objectives will be instantly achievable, but a values-based budget will help you to manage cash flow, prioritise your goals and direct your money towards those goals that are really important to you.

  1. Use technology to monitor and track your expenditure

There’s no point monitoring your expenditure if you’re not prepared to manage it carefully to ensure that your expenditure remains directed towards your goals. Most banking apps have fully integrated money management and budgeting facilities that allow you real-time oversight of your budgeted versus actual expenditure, allowing you to rectify matters before they get out of hand. Do your research and download whatever app is best for your circumstances, and then commit to regularly reviewing your expenditure.

  1. Mitigate your risks

While you are building your wealth, long-term insurance can play an important role in protecting you against the risk of disability (whether temporary or permanent) or ill health. Your ability to generate an income is the foundation on which your wealth will be built, so be sure to protect your income by putting appropriate risk cover in place. This can be done by implementing an income protection benefit or capital disability cover, or a combination of the two. That said, disability insurance is a highly technical and specialised area of insurance so be sure to consult with an independent advisor who has experience sourcing and structuring disability benefits.

  1. Employ good debt strategically

Not all debt is equal, and employing good debt to leverage your financial position may be a strategy worth employing. Good debt, such as a low-interest student loan or home loan, is debt that is incurred to pay for big-ticket items that one would not otherwise be able to afford. For instance, taking out a home loan allows you to leverage affordable debt to help you invest in a property which you would otherwise not afford to pay cash for. On the other hand, debt that is incurred to purchase clothes, consumables and other goods and services are generally expensive debt and not sustainable in the long term. If you’ve accumulated debt across a number of credit cards and/or retail accounts, employ a debt reduction strategy to eliminate your debt as quickly as possible. Remember, while you’re servicing high-interest, unsecured debt, it is almost impossible to start saving, build an emergency fund and invest for the long term.

  1. Create a cash cushion

An emergency fund is an often overlooked but fundamentally essential component of one’s overall financial portfolio and serves several key functions in securing your financial position. An emergency fund is a specially earmarked sum of money that is easily accessible and that can be used to help cover unforeseeable, high-cost expenses which, in its absence, could have catastrophic effects on your financial position. Ideally, your emergency fund should be clearly earmarked for the purposes of such expenses so that the money does not serve dual or even multiple functions in your portfolio. For instance, a lump sum should not be set aside for emergency expenditure while at the same time being accessible for festive season spending or considered for home renovations. To ensure that you don’t access these funds inappropriately, consider making a list of acceptable expenses the money can be used for.

  1. Invest tax-efficiently for the future

Your future self will thank you for beginning your investment journey early in your career even if your retirement plans are unclear. The most tax-efficient way to achieve this is by investing towards an approved retirement fund and claiming the tax back on your contributions. This can be done effectively through a retirement annuity structure which allows you to build capital during your working years so that you have enough money to enjoy the same standard of living when you retire Taxpayers are permitted to invest up to 27.5% of their taxable income on a tax-deductible basis into a retirement annuity up to a maximum of R350 000 per year. Over and above the obvious advantage of investing with before-tax money, no dividends or capital gains tax is charged on investment returns achieved within a retirement annuity. Further, the money that you invest in a retirement annuity is deemed to fall outside of your estate and is therefore protected from creditors.

  1. Document your last wishes

Regardless of your marital status, net worth or age, it is always advisable to have a valid will in place. There are a number of requirements that need to be met to ensure that your Will is valid, and we, therefore, caution against using DIY will templates. Keep in mind that if your will is found to be invalid for whatever reason, you may be deemed to have died intestate which could have unintended consequences for your estate planning.

  1. Invest your profits

Once you have taken advantage of the tax deductions afforded by a retirement fund, such as a retirement annuity, it makes sense to invest any additional surplus income rather than leave it in a bank account. Vehicles that can be used for these purposes include tax-free investment accounts, endowments (for those in a tax bracket above 30%) and unit trusts. Keep in mind that your investment horizon and goals play an important role in determining an appropriate portfolio. For instance, if you’re planning to invest money for a two-year period as you save towards purchasing a property, you would likely consider investment options such as money market or flexible income funds. On the other hand, if you’re saving towards your new-born child’s tertiary education which have a longer time horizon, you would want greater exposure to shares and property as you are able to tolerate more investment volatility to potentially achieve higher investment growth.

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